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The rise came after Congress struck a deal to avoid a bundle of automatic tax increases and spending cuts known as the "fiscal cliff." Many economists had warned that those measures could throw the economy back into recession. The agreement sparked a relief rally in markets globally and sent investors out of havens such as Treasury bonds.

Still, an undercurrent of caution remained as corporate executives and investors expressed disappointment about the reduced scope of the deal, which props open the door for further budget wrangling in coming months. The stock market has many hurdles ahead, some investors warned, including economic data such as the jobs report on Friday.

"It's good that they struck a deal, but there's a harder fight in the next six to eight weeks, and it's tough to imagine the market doesn't stay choppy until we get past the debt-ceiling debate," said Richard England, portfolio manager for Atlanta Capital Management, which manages $14 billion in assets. "That doesn't mean the market has to go down in the interim, but maybe it doesn't go up much either."

Mr. England said he isn't making any major bullish or bearish bets amid the continued political uncertainty.

Earnings season begins next week, a period that could show that business was weak as companies held off amid uncertainty over whether a budget deal would pass. By late February or early March, lawmakers must reach agreement to raise the debt ceiling, enabling the government to keep borrowing. And spending cuts that were deferred this week will kick in on March 1 unless a new agreement is reached.

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The broad-based rally saw all 30 Dow components and about 490 of the S&P 500 companies tack on gains. Above, traders on Wednesday.
Reuters

Ratings firms also signaled that the country's credit rating still remained under threat, and that more would need to be done to address the deficit.

Steven Hess, Moody's Investors Service's top U.S. analyst, said Wednesday that the fiscal-cliff package keeps the government debt burden at a high level that "maybe…isn't sufficient" to support Moody's triple-A rating. Mr. Hess said Moody's is waiting to assess the outcome of budget negotiations in coming months. Moody's rates the U.S. triple-A with a negative outlook.

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Standard & Poor's Ratings Services in a report said the measures do "little to place the U.S.'s medium-term public finances on a more sustainable footing." S&P analysts have also said they are waiting to assess the outcome of debt-ceiling and other budget negotiations before taking a rating action. S&P cut its rating on the U.S. one notch to double-A-plus with a negative outlook in August 2011 amid political brinkmanship over raising the debt ceiling.

"This is a very small deal; they're truly kicking the can down the road," said Milton Ezrati, senior economist and market strategist at Lord Abbett in Jersey City, N.J. "This takes one threat off the table, and it's only natural to see some relief. But there's still a long way to go, and the market is aware of that."

Still, investors on Wednesday piled into stocks, in particular, small-capitalization shares. The Russell 2000 index of small-cap stocks soared 2.8% to a record. In Europe, Germany's DAX index marched to its highest level in five years, while India's stock market claimed a two-year high.

The Dow Jones Transportation Average, an index of 20 railroad, airline and shipping companies that is seen by some investors as a forerunner for the Dow industrials, advanced 2.4% to its highest level since July 2011.

Amid the rush into stocks, demand for Treasurys dropped, pushing the yield on the 10-year note up to 1.839%, the highest level since mid-September. Bond yields rise as prices fall.

The CBOE Market Volatility Index, the "fear gauge" known as the VIX, fell to its lowest level in five weeks.

In corporate news, Zipcar soared $3.94, or 48%, to $12.18, after the car-sharing-network operator agreed to be acquired by Avis Budget Group for about $500 million. Avis Budget rose 95 cents, or 4.8%, to 20.77.

Macy's fell 71 cents, or 1.8%, to 38.31, to lead a batch of retailers lower, one day ahead of same-store-sales figures for December. Consensus estimates have been slipping in recent days. Abercrombie & Fitch gave up 41 cents, or 0.9%, to 47.56, and Kohl's pulled back 77 cents, or 1.8%, to 42.21.

Magnum Hunter Resources gained 16 cents, or 4%, to 4.15, after the oil-and-gas company signed a joint operating agreement with closely held Eclipse Resources I, governing shale formations in Ohio.

Synergy Pharmaceuticals surged 95 cents, or 18%, to 6.21, after the company said a later-stage study of its chronic constipation treatment met its primary and key secondary goals.

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